New Oil Funds Replacing Dying UWTI Differ

Nearly one month after delisting from the NYSE, the VelocityShares 3x Long Crude Oil ETN (UWTI) is a shell of its former self.

Abandoned by Credit Suisse, the former billion-dollar product has been left to trade over-the-counter. Volume on recent days has only been a few hundred thousand shares, compared with more than 20 million shares before the delisting.

Sensing opportunity, competing issuers launched a pair of new products to fill the void left by UWTI: the Citigroup-backed VelocityShares 3x Long Crude Oil ETN (UWT) and the UBS Etracs - ProShares Daily 3x Long Crude ETN (WTIU) (incidentally, they launched two inverse counterparts also, DWT and WTID).

The irony is that even after its delisting and the rise of new competitors, the original UWTI is still the largest of the three available U.S.-listed triple-leveraged oil ETNs. Assets under management for the original stand at $220 million―a fraction of the nearly $1.8 billion it had at its peak―but more than UWT's $175 million and WTIU's $26 million.

For now, the original UWTI continues to trade somewhat normally. Thanks to Credit Suisse's move to decrease the minimum redemption amount for the notes from 25,000 units to 500, UWTI has continued to track its net asset value closely despite a steep reduction in liquidity.

Still, make no mistake, UWTI is a dying product. Along with its delisting, Credit Suisse suspended creations of the exchange-traded note (ETN) on Dec. 9, meaning that, following that date, the number of notes outstanding could only shrink, not grow. So while it may still be feasible to trade UWTI today with minimal transaction costs, eventually, liquidity will dry up so much that it simply won't be possible any longer.

UWT Gets Head Start On WTIU

Fortunately for leveraged oil traders, there are a number of solid replacements for UWTI. A previous article on ETF.com outlined several of them, but that was before the launch of UWT and WTIU. Aside from the original UWTI, these new ETNs are the only other products to offer triple-leverage exposure to crude oil futures.

UWT got a head start on WTIU, with the former launching on Dec. 8, compared with just last week for the latter.

Thus, unsurprisingly, UWT has almost eight times as much in assets under management. In turn, UWT is the more liquid of the two, with volume levels exceeding 3 million shares in recent days, versus only several thousand for the nascent WTIU.

Tip: For deeper research, see a list of oil ETFs, a list of leveraged ETFs, or use etf.com's ETF comparison tool.

Differentiating Factor: 3x WTI Crude Oil

With expense ratios nearly identical (and not much of a consideration for short-term traders in such risky vehicles anyway), UWT is seemingly the better choice than WTIU as it stands now. That said, there is one differentiating factor that could tip the scales in favor of WTIU for some traders.

WTIU provides 3x exposure to the Bloomberg WTI Crude Oil Subindex ER, while UWT provides 3x exposure to the S&P GSCI Crude Oil Index ER. The difference is small, but under the Bloomberg index, oil contracts are purchased three months out and held for two months, while under the S&P GSCI index, the front-month oil contract is purchased.

During times of steep contango, WTIU and the Bloomberg index may provide a slight edge when it comes to returns. However, for most traders, it's unlikely to be enough of an edge to compensate for the ETN's liquidity disadvantage.

In any case, there's plenty of opportunity for both UWT and WTIU to attract traders and gather assets going forward. After all, the original UWTI had $1.8 billion in AUM just a few months ago. UWT and WTIU together only have about $200 million currently. That's well over $1 billion that could potentially flow into these or similar products in the future.

At the time of writing, the author did not own any of the securities mentioned. Contact Sumit Roy at [email protected].